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Business Structures for Consultants

Dear Mr. Premack: Before I retired, I was a computer specialist for my employer. When I retired, I began to do private consulting work — some for my old employer, some for new customers. The living I make from consulting has been pretty good, and I wonder if it is time to formalize my business. What options exist to structure the business? – E.S.

A business may be structured in one of three ways: as a Sole Proprietorship, as a Partnership, or as a Corporation. Each has different advantages and requirements. A sole proprietorship ends automatically when you die, but a Partnership and Corporation may continue to exist after your death since they legally exist separate from you.

Most businesses like yours are set up as sole proprietorships. This means that there is only one owner, who is responsible for all operation and ownership of the company. The only formality is to register your business name with the county clerk.

However, sole proprietorship does not provide you with any insulation from liability. To limit your risks, you need to form a Corporation. Texas corporate laws are about as liberal as anywhere in the U.S., and allow a single owner to run the entire company.

When the corporate formalities are followed, your personal assets cannot be held liable for the corporation’s actions. This shield exists only if you adhere to the corporation’s required organization.

Structurally, a corporation must have at least one owner (the shareholder). The shareholder elects a Board of Directors, who decide on overall goals and policies for the corporation and who elect officers. They must elect at least a President and Treasurer.

Texas corporate laws allow a “one-person corporation” — that is, you can personally fill all of the roles. You may be the sole shareholder, the sole Director, and fill all the officers’ positions. But if you do this, you must be very careful to honor the separate existence of your corporation.

Partnerships require at least two owners, who agree to split the costs and profits of owning the business. A partnership can be created on a handshake, but I highly recommend anyone going into business with a partner to sign a written partnership agreement. The most difficult moment in a partnership is its break-up; pre-planning for this eventuality can really simplify the event.

Partnerships and Corporations also follow their own unique income tax rules, but a sole proprietorship has no separate income tax return. Choosing the proper business form should be done in consultation with your attorney and C.P.A., and I encourage you to contact them.